EVENT – P & Web IV: What You Need to Know

Takeaway:Join us Thursday, September 24th at 12pm and 2pm EDT for a two-part event on the implications of Web IV on P.

The Web IV decision will be a pivotal event for P, with the potential to derail its business model. The decision will be issued no later than December 15th, and we may get an early read this week in the Register's response to the CRB Judges' questions.

We will be hosting a two-part event on Thursday, September 24th at 12pm and 2pm EDT to discuss both the bull and bear cases.

MONDAY MORNING RISK MONITOR | RISK IS GROWING

Takeaway:High yield rates and the TED Spread are both signaling that risk is rising despite the Fed's decision to remain at bay.

Key Takeaway:

While equities were broadly weak on the Fed's decision to keep rates unchanged, CDS tightened around the globe. That said, counterparty risk, as measured by the TED spread, rose notably last week on the Fed's decision. The TED Spread increased by +5 bps to 36 bps. Additionally, High Yield rates increased by +21 bps to 7.30%.

1. U.S. Financial CDS – While the stock market fell following the Fed's meeting, the perceived risk of default for domestic financial institutions declined last week. Swaps tightened for 18 out of 27 domestic financial institutions.

Tightened the most WoW: HIG, WFC, CB Widened the most WoW: MMC, LNC, GNW Tightened the most WoW: CB, AGO, ALL Widened the most MoM: SLM, MMC, LNC

2. European Financial CDS – Similar to the U.S., European equities fell last week. However, CDS mostly tightened with an average change of -8 bps.

10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 1 bps to 10 bps.

CHART OF THE DAY: Performance Lessons of the Last 3 Months

Editor's Note: The chart and brief excerpt below are from today's Early Look written by Hedgeye CEO Keith McCullough. Click here if you're tired of lousy, consensus research and want to stay a step or two ahead of the macro herd.

...That’s why, from a Style Factoring perspective, if all you’ve done in the last 3 months is downshift your portfolio’s Equity Beta (i.e. sell your cyclical and chart chasing betas), you’ve beaten most of your competition.

Here’s how “Low-Beta” (mean performance of the Top Quartile in the SP500 vs. the Bottom Quartile) has performed:

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0% Contradiction

While “getting off of 0%” with a rate hike (into 2015 #GrowthSlowing) is something that the same crowd that didn’t want a rate hike (into 2013 #GrowthAccelerating) is a classic Wall Street contradiction, it’s consistent. Consensus begs for what it’s positioned for.

As Klein goes on to explain in Chapter 5 of Seeing What Others Don’t, “Contradiction insights send us on the road to a better story. They signal that there’s something seriously wrong with the story we’re currently telling ourselves.” (pg 61)

Fortunately, we humble observers of Mr. Macro Market’s signals have an opportunity to obtain insights into the rate of change in Global Economic Growth & Inflation, every day. The best story you can tell yourself is that you beat consensus.

Back to the Global Macro Grind…

Friday’s -1.6% drop in the SP500 came on massive volume. Total US Equity Market Volume (including dark pool) was up +24% and +26% vs. its 1-month and 1-year averages, respectively. That took the SP500 to -4.9% for the YTD and -8.1% from its YTD peak.

For the week, you might say nothing happened. Especially if you run the place, you can pretty much tell yourself whatever you want. Reality, however, is timestamped, across durations. Here’s last week’s score with a 1-month overlay as context:

US Dollar Index flat on the week and down -1.9% in the last month

Japanese Yen up another +0.5% on the wk (vs. USD) and +3.7% in the last month

CRB Commodities Index -1.3% on the wk and -1.3% in the last month

OIL (WTI) up another +0.7% on the wk and +4.2% in the last month

Gold was the biggest macro winner last week = +3.2% on the wk and +2.0% in the last month

Long-Bond (10yr Treasury) down -5 bps last wk to 2.13% (-6bps in the last month)

SP500 down another -0.2% on the wk and -6.6% in the last month

US Financial Stocks (XLF) -2.0% on the wk and -10.4% in the last month

European Stocks (EuroStoxx600) -0.3% on the wk and -8.6% in the last month

Emerging Market Stocks (MSCI Index) +3.1% on the wk and -2.4% in the last month

What you see here (on both a 1 week and 1 month duration) is that macro markets look a lot like they did when US and European growth slowed into the back half of 2011. The end of that move capitulated with both Gold and the Long Bond at all-time highs.

There’s plenty of contradiction in how the Federal Reserve depicts the #LateCycle US labor market and the “transitory” nature of both cyclical growth and inflation slowing, globally. At the same time, the market is pricing in something that looks like stagflation.

In other words, for the last month, you’ve made a lot more money:

A) Buying Oil and Gold instead of the US and/or European stock markets

That said, you wanted to have timed the Fed punting on the “rate hike” right. Because being long Oil and Emerging Market related equities would have train wrecked your year. Don’t forget that US Energy Stocks (XLE) are -20.3% YTD.

Got timing?

I certainly hope you have a way to think about it. There’s contradiction in telling your investors that you are super long-term in nature but not completely aware of the super-secular headwinds to both growth and inflation, from a demographic perspective.

How about sentiment?

Building #behavioral models to help contextualize when consensus is positioned for reality (as opposed to fighting for the positions they’ve already built up – like “Long Financials because we have to raise rates eventually”) is also critical.

There are plenty of indications in non-commercial futures/options positioning that suggest that consensus is now bearish on growth. This typically happens AFTER market moves:

SP500 (Index + Emini) net SHORT position hit its highest of the year last week at -240,720 contracts

US Dollar net LONG position dropped another -13,666 contracts to its lowest of the year at +39,364 contracts

In other words, as US growth slows, both the US currency and equity market positioning reflect both the fundamentals and our proprietary signal (both USD and SP500 are signaling bearish on both our TRADE and TREND durations).

That’s why, from a Style Factoring perspective, if all you’ve done in the last 3 months is downshift your portfolio’s Equity Beta (i.e. sell your cyclical and chart chasing betas), you’ve beaten most of your competition.

Here’s how “Low-Beta” (mean performance of the Top Quartile in the SP500 vs. the Bottom Quartile) has performed:

One-week duration = +1.1% (vs. High Beta -0.6%)

One-month duration = -4.7% (vs. High Beta -6.0%)

Three-month duration = -2.3% (vs. High Beta -13.7%)

Yes. The performance lessons of the last 3 months are more obvious than the last month. But my point here is that even if you missed shifting your portfolio 3-6 months ago, you could have reset and beat consensus in the last month anyway.

Sometimes there’s 0% contradiction in sentiment being bearish, when it should be.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 2.11-2.21%

SPX 1 Oil (WTI) 43.48-48.71

Gold 1120-1146

Best of luck out there this week,

KM

Keith R. McCullough Chief Executive Officer

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09/21/15 07:43 AM EDT

The Macro Show Replay | September 21, 2015

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09/21/15 07:40 AM EDT

Dovish Fed

Client Talking Points

DAX

The Fed’s Dollar Devaluation (EUR/USD +2.5% month-over-month) thing isn’t appreciated by either the DAX or ECB President Mario Draghi (he testifies to European Parliament Wednesday). The DAX is down another -0.6% and keeping the crash (-20.4% since APR) in play, but signals immediate-term oversold here, for a trade.

OIL

Gold and Oil were +3.2% and +0.7%, respectively last week (vs. SPX -0.2%) and WTI is up another +1.5% to $45.34 this morning taking it to +5.7% in the last month (vs. SPX -6.6%) – is the new perma bull U.S. stock market catalyst “higher gas prices”?

YEN

Signaled immediate-term TRADE overbought on Friday as the USD was signaling oversold (and Gold immediate-term overbought); the risk ranges in all of these big FICC trades (USD, Rates, Oil) are narrowing now (leading indicator for lower highs in volatility).

**Tune into The Macro Show with Hedgeye CEO Keith McCullough at 9:00AM ET - CLICK HERE.

Asset Allocation

CASH

70%

US EQUITIES

0%

INTL EQUITIES

0%

COMMODITIES

6%

FIXED INCOME

24%

INTL CURRENCIES

0%

Top Long Ideas

Company

Ticker

Sector

Duration

MCD

McDonald’s remains one of our Restaurant teams Best Ideas on the LONG side. We continue to believe that 3Q15 will be the inflection point for the company’s turnaround and that we are going to be looking at a much different company 1-3 years from now.

Urgency has been instilled from the top down by new CEO Steve Easterbrook. He wants more speed and is encouraging people to get things done faster. The food and experience provided to the customer will greatly improve over the coming months as “Experience the Future” is implemented across the system. It won’t be instantaneous though, as MCD has a lot of work to do around changing the perception to bring back customers it may have lost.

Regional numbers for August have come in soft, but we predicted the August weakness. September revenues should rebound and serve as a catalyst for the stock going into Q3 earnings. On the research side we have not altered our views of PENN’s long term growth story. We continue to see more upside from current price levels.

TLT

Slower (and Lower) For Longer remains our non-consensus call. It's nice to see that the Fed is finally starting to see what the #GrowthSlowing late-cycle data does.

GROWTH: is #LateCycle and will be slower (again) in Q3 than it was in Q2

INFLATION: misreported, yes – in the area code of the Fed’s 2% “target”, no

Our estimate for Y/Y% GDP for Q3 is a range of 0.1% to 1.5%. Even the Q/Q SAAR # that consensus hangs on will be comping against a 3.7% Q/Q SAAR GDP print (second revision). Good luck positioning for a rate hike. Prepare for the fade…. AGAIN.

TWEET OF THE DAY

QUOTE OF THE DAY

What people say, what people do, and what they say they do are entirely different things.

Margaret Meade

STAT OF THE DAY

Total U.S. Equity Market Volume (including dark pool) was up +24% and +26% vs. its 1-month and 1-year averages, respectively.

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